Thrive in Grey—Is the Market Up or Down?

Human beings are not made for markets by nature. Whenever something contrary to expectations happens, we immediately judge, label, categorize, draw conclusions, etc. But the stock market does not bow down to all this. At any given time, multiple outcomes are possible, and any given outcome can be attributed to multiple causes and/or their interplay. Economics of old assumed that humans are rational and logical, but more recently Nobel Prizes have been awarded to scientists who study human behavior, and challenge this assumption. Humans are not rational and logical; Now we are told that they are emotional and psychological. Humans are deterministic, markets require us to think probabilistically. Humans want conclusions, we need to be open minded to the markets. Humans want to pronounce winners and losers; The markets expect us to learn the game to the specifics. Man wants to reach the destination; Market is a journey. Man seeks comfort in categorizing the world into black and white, good and bad, right and wrong but the world is a spectrum of grey.

Acclaimed American philosopher, F. Scott Fitzgerald said: “The test of first-rate intelligence is the ability to keep two opposing views in mind at the same time, and yet retain the capacity to act.”

In March 2020, when the outbreak of COVID-19 occurred, markets fell by 35-40% and some stocks by 60-70%. The market reaction suggested that companies might be worthless, that investing in them was pointless, and that humans were the next dinosaurs. quick to draw conclusions; But equally fast to relax and draw the opposite conclusion. By November 2020, the market crossed the previous high and by October 2021, the Nifty 50 made an all-time high of ~18,500. Conclusion in March 2020: Humans are the next dinosaur. Conclusion in October 2021: Man is invincible. My learning was: “Be open to possibilities but prepare for eventualities.”

In our profession, it is very common to be asked, “Is the market up or down, will it go up or down?” People expect the right answer, but the job of the market is to monkey with the people who give the right answer. Stock markets are sine waves and crests are followed by troughs, then crests, etc. But unlike electric currents, in a stock market sine wave, the center line is tilted up by about 45 degrees. If we look at the long range past, the markets are near the top today. If we look at the long range future, the markets are near the bottom. Humans seek certain guidance, but what matters is context and perspective.

A key principle of financial planning is asset allocation. Yet how many investors follow asset allocation strictly? Even if they start off right, somewhere along the journey they get swayed by a hot new product, a change in taxation or the latest market “call”. But strategic asset allocation is based on probabilistic thinking; Anything.

There is a perennial debate whether we should choose value or growth, defensive or cyclical, large mid or small cap stocks. However, the broad market represented by the BSE 500 index includes all genres, all sectors and large mid and small cap stocks. Winners turn around as different components of the market underperform in response to macroeconomic changes. The answer is a diversified portfolio that has all the factors of the market but with better stock picking and balanced portfolio construction. Instead of being brilliant once in a while, aim to be consistently right.

I recently read Alchemy by renowned author and Vice-Chairman of the Ogilvy Group Rory Sutherland and I quote “The opposite of a good idea can also be a good idea”. This means that there are no good or bad thoughts, only choices. Thinking in black and white may lead to a few sleepless nights and make you feel temporarily smart, but in order to thrive we must learn to rest in the gray.

Ashish P. Somaiya is the Chief Executive Officer of WhiteOak Capital Asset Management Limited.